hey Traders and welcome to another episode of smart risk one of the most challenging steps in trading is setting up entry points in the market especially for smart Money traders it can be particularly challenging because many smart Money traders are unsure whether to use fair value gaps or order blocks to execute trades in the market in this Advanced episode we're going to clarify these doubts and explain the scenarios and price actions where each method shines we will delve into the key points and criteria that you need to consider in your trading strategy to choose the
best possible entry method in the market for executing trades ultimately leading to more winning trades so Traders if that's something you're interested in please give this video a thumbs up to show your support and subscribe to our Channel if you are new see you after [Music] intro welcome back Traders so let's get started as you know guys order blocks and fair value gaps are two areas that smart Money traders use as entry points to execute their positions in the market however there is often confusion among Traders about which of these areas offers a higher probability
and is more likely to be respected by the price here we have an example where the price hits the higher time frame order block but not the lower time frame order block this highlights a key point that needs to be considered if the price frequently misses your entry it suggests too much refinement is taking place now let's take a closer look at this example we see that the price was in a downtrend until price reversed its direction pushed higher and after taking out the inducement level eventually created a change of character by breaking and closing
Above This major high with the emergence of a change in character indicating an upcoming bullish Trend we look to enter the market by opening a long position now where do we look to go long on this chart firstly we need to identify the discount Zone which includes these higher and lower time frame order blocks inside it if you truly wanted to enter the trade and place a buy position based on the higher time frames order block you could have simply entered a buy limit order at the highest point of the higher time frames order block
with the lowest point of the order block area as your stop loss this approach would have allowed you to enter the market and the price would like have moved upward after activating your bu limit order however it's important to note that setting such an entry would result in a very large stop loss leading to a small reward to risk ratio in every trade this exposes you to higher potential losses if the trade moves against you if you aim to have a Tighter stop-loss and a higher reward to risk ratio you need to refine your entry
area many Traders often focus on the extreme lower time frames order block at the bottom as seen in most analyses this approach may seem perfect because it offers a very tight stoploss and already provides a high reward to risk ratio however if the extreme lower time frames order block were hit every single time the market would appear as a zigzag pattern everywhere which is not realistic because price does not often make such deep retracements so what is the solution for this many times order blocks are not respected but what is often seen in scenarios like
this is that the fair value Gap is respected quite often especially in lower time frames now let's bring everything together and consider what price is more likely to do when it reaches the order blocks in Fair Value gaps under various circumstances so in the higher time frames like 1 hour or 4H hour time frame the price is more likely to respect the order blocks rather than the fair value gaps on the other hand in the lower time frames price is more likely to respect the fair value gaps rather than order blocks located at the extreme
a areas before we continue if you're curious about how we stay updated on financial news and fundamental analysis well we rely on fastb one of the best trading websites with various useful trading tools this site provides one of the most accurate and detailed economic calendar a tool we use every day before starting our technical analysis 247 economic live streaming also allows us to stay informed about the latest trading world's news and fundament Al analysis so if you want to benefit from multiple trading tools that can significantly improve your trading make sure to check the link
in the description so let's imagine that price creates a structure like this one on the lower time frame as we mentioned before on the lower time frame like 15 minute or 5 minute the price is more likely to respect the fair value Gap that is formed below or above the order blocks and get reversed from it before mitigating the lower time frames order block which is located at the stream the idea of using lower timef frame fair value gaps to determine entry points can be quite effective setting up entries based on Fair Value gaps often
results in a higher hit rate compared to extreme order blocks however when using fair value gaps to enter the market in a bullish scenario we typically place our limit order at the highest point of the fair value Gap and our stop loss should be positioned below the extreme order block this approach results in a wider stop loss which directly reduces the reward to risk ratio of the trade setting a tighter stop loss just below the lowest point of the fair value gaps can be an option however this approach does expose trades to higher risk the
extreme order block situated below the fair value Gap area might still influence price action leading to a downside movement that triggers the stop loss therefore while a tighter stop loss may seem appealing it's crucial to carefully consider the potential risks involved before implementing this strategy as mentioned earlier on higher time frames we primarily focus on order blocks for entries even though Traders can still stick to solely relying on order blocks on Lower time frames however it's essential to consider that following this approach may cause traders to miss out on numerous trading opportunities now we have
already discussed the scenarios that we might encounter in the market where the price respects order blocks fair value gaps or both however in the market we might encounter another scenario where the price does not respect any of the order blocks and fair value gaps let's delve into this specific scenario and see what the main reason behind it is most probably you found yourself in a situation where you identified A Perfect Trading setup and a great opportunity to enter the market once all the criteria of your trading strategy are met you've also identified a perfect trade
setup and you were eagerly waiting for the price to fulfill your pending order which was placed on the fair value Gap or order block you identified earlier you were getting excited about having a perfect trade but somehow the price continued in the direction you were about to open positions aligned with without activating your pending orders placed on the extreme of the fair value gap or the order block eventually you missed the trade the main reason why the price is likely to behave in this manner is that it creates a significant inefficiency when attempting to retrace
back to the fair value Gap or order Block located at the extreme in such a scenario as the price creates a substantial inefficiency on its way towards the extreme order block or fair value Gap it struggles to resist the massive liquidity voids behind it therefore it experiences a pause to fill the liquidity voids caused by the inefficiency however as the price retraces back and aligns with its dominant Direction it fails to push in the opposite direction to activate pending orders located at the order block or extreme fair value Gap this is because when the price
aligns with its dominant and primary Direction it absorbs the significant momentum from the orders executed by Traders who anticipate that the pric is retracement phase is over and it's time for the price to continue in its primary Direction the series of actions Propel the market in the Price's dominant Direction without activating limit orders at the order blocks and fair value gaps if we examine this trade example in the euro dollar pair we see that the price is in a downtrend and is already established a bearish break of structure by breaking and closing below the most
recent major low as Illustrated there's an order block at the extreme and we can also identify a fair value Gap just beneath the order block we can take advantage of these areas as entry points as we analyze the chart we can see that the price has begun to retrace back to down toward our identified order block and fair value Gap at the extreme however the price changes its direction before reaching these zones the main reason for this change in Direction lies in the inefficiency that has been formed within the retracement wave let's consider a general
trading example where we bring together various Concepts discussed previously in this episode here we have the euro dollar 15minute time frame displayed on the screen we see that the price moved lower and also mitigated the 1-hour time frame's demand area which is situated below the liquidity pool formed by the equal lows upon zooming into that area we noticed that the higher time frames demand Zone was respected following the mitigation of the higher time frames demand the price pushed to the upside and after taking out the inducement level broke out and closed above the most recent
major High thus creating a valid change of character in The Next Step we are exploring potential entry points to go long the first entry opportunity here would have been at this order block situated at the extreme let's say that we missed this entry where would you look to enter long we see that the price has made another bullish movement to the upside and has also created a bullish breakout of structure confirming that the price has changed its direction to bullish now as we start to look for an entry we have two options to consider the
usual approach approach used by many Traders is to use the order blocks at the extreme side here we have an imbalance that needs to be filled and this order block is situated under the fair value Gap our entry strategy would be as follows we wait for the price to retrace back down to activate our by limit order which has been placed at the highest point of the order block area and then push to the upside in the second option we are considering entering the market from the fair value Gap area this approach is commonly seen
in lower time frames when entering from the fair value Gap it's important to consider a key point you could place your entry at the highest point of the fair value Gap and set your stop loss just below the fair value Gap area while this strategy can be effective at times it's important to note that your stop loss will be very tight additionally since we have an unmitigated order block at the extreme there is a possibility that the price could push downward to fill it so our recommend keeping your stop loss a bit wider by placing
it beneath the order block the whole point of this type of Entry is to reduce the possibility of missing a trade although it does reduce the reward to risk ratio now let's consider what would have happened with both of the trades for the first option if we had waited for that order block this is what would have happened let's say that we already had our takeprofit set at this high it's clear that we would not have entered this trade since the price couldn't activate our by limit order if we had entered from the fair value
Gap our buy limit order would have been activated and our takeprofit would have been hit by the price we can see that the trade played out without pulling back to the extreme order block that's it Traders thank you for watching this video I hope you found it informative and useful don't forget to hit the Subscribe button and turn on notifications to stay updated on our latest videos we value your feedback and suggestions so please leave your comments below and let us know what topics you'd like us to cover in our future videos we appreciate your
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